March 23, 2016

More on the UBI

Keith Rankin has an overview of the UBI arguing that it is basically a zero-cost reform of the tax system:

The way to do this is to tax all income at source at an appropriate rate – say between 33% and 37% – and to distribute a substantial proportion of that revenue, equally, to public equity beneficiaries. It’s that simple conceptually, and our present income-tax systems are much closer to this ideal than we realise.

In New Zealand it would not be a fiscal revolution to tax all income at the same 33% rate and to ensure that every tax-resident adult received in return at least $175 each week from public revenue; it would in traditional terms be equivalent to a tax cut for some people. (It would, however, be a conceptually revolutionary change for academics, politicians, public servants and journalists to think through.) For maybe half of New Zealand tax-residents the only change they would see would be in the itemisation of their pay-slips, or their benefits. For most of the rest, there would be an extra after-tax income of a few dollars per week.

I guess this is conceptually revolutionary because I honestly don’t understand it. Most people pay effective tax rates quite a lot lower than this on the bulk of their income. So this sounds like a plan to raise people’s taxes and then pay them the money back again, with the half on lower incomes getting a bit more. At no cost, somehow. Do I have that right?

No cost to the state, because you accompany the increase in spending with an increase in taxes.

But in his example the people whose taxes you’re increasing are the people you’re paying the money to! Lower income workers pay more taxes, but somehow get a payout that means their income will be higher.

The issue that the policy would address is the exceptionally high Effective Marginal Tax Rates which people face when moving from welfare to work, and then as other benefits abate away. It would also get rid of a lot of admin and humiliation for people having to lay their lives bare to apply for benefits.

But it only delivers those gains if the weekly wage can be set high enough that it is appropriate for a family so that all other benefits can be abolished. This would seem to make it too high to not be a potential lifestyle choice for an 18 year old. The weekly wage also has to be set at a level that does not require personal tax rates to be increased too high relative to other countries, particularly Australia. It is not really possible to increase the company tax rate without creating an even worse avoidance problem for multinationals. A capital gains tax would be required to help bridge the gap. Maybe GST would have to go a bit higher.

Having said that, I would be comfortable with the weekly wage being set at quite a low rate, and all other welfare abolished, and I support a CGT on all assets, including the family home, and on all gains, realised and unrealised. I also think GST could quite sensibly be set at 20%. Therefore, I think the UBI could be made to work and so I support it in principle. But the scheme I would support I don’t think would be one Labour could support. And I don’t think they would every be able to get their maths given their reluctance to take some of the steps I outline above.

People on lower income pay more taxes but get a big chunk of money, so (some*) of them come out better off. People on middle incomes (40-50k pa) end up, I think, about the same, although implementation details start to matter a lot here for specific households – what happens to WFF, is there a Children’s UBI, etc. And then people on higher incomes (depending on the precise model, I suspect something like 45-50k and upward) pay for the increase in after tax incomes for people on lower incomes.

I think. The calculations on these questions are often weird because they involves things like “assume we abolish a hugely popular programme for subsidising middle class incomes”, or “now we abolish the pension”, or “now we abolish the DPB” which are very unlikely.. And most everyone writing about the UBI to date is a true believer, so you have to take their calculations with a grain of salt.

* depending on implementation details changes to things like WFF and benefits could make some people on lower incomes drastically worse off.

Keir Leslie: I assume it has to involve the abolition of WFF. Maybe there would have to be a universal child payment until kids were 18 to replace it and the DPB. Presumably superannuation goes altogether.

depending on implementation details changes to things like WFF and benefits could make some people on lower incomes drastically worse off.

Thanks Keir and Matthew.

It was always the problem with Gareth Morgan’s UBI. First you drastically cut superannuation, and all the retired people sell all of their properties and move in together, was Morgan’s solution as to how that would play out, along with a sneer about how politicians lacked ‘the balls’ for something so obviously completely suicidal.

people on higher incomes (depending on the precise model, I suspect something like 45-50k and upward) pay for the increase in after tax incomes for people on lower incomes.

That’s how I’d expect it to work, although that is how Rankin specifically says it won’t work. ‘For maybe half of New Zealand tax-residents the only change they would see would be in the itemisation of their pay-slips, or their benefits. For most of the rest, there would be an extra after-tax income of a few dollars per week.’

If you’re going to redistribute income, that income has to come from somewhere. The options for a UBI in the region being discussed here are basically either (a) low income households – abolish the DPB, Super, etc, or (c) soak the rich, where rich probably starts at high school teachers and senior nurses.

I think that’s fundamentally the point of UBI. Everyone pays more tax, but everyone also gets a guaranteed handout. Which is the classic govt washing machine problem (how much stays in the bureaucracy, why are we doing this).

But the big benefit is avoiding the very high effective marginal tax rates associated with abatement of govt benefits. Which is something that is worth pursuing. As to whether this is the right way to do it, not sure yet.

For the working (or otherwise earning taxable income), a UBI of $175 is neutral. I.e. If you currently earn $70k, you pay $14,020 in tax. But with a flat tax of 33%, you will pay $23,100 in tax, but receive the UBI of (52*175) $9,100, for a “net” tax of 14,000. keith sets $175 as the weekly amount that means that the extra tax minus the UBI means no more/no less for those earner $70k or more. but every one earning less will be better off. See example (also using $200):

Problem is that WFF is worth a fair bit to those people who currently get it. So, my guess is that either you have a very expensive child UBI to match WFF top rates, which blows the budget out and forces tax rates up, or you slash the amount people currently in receipt of WFF get.

And worth saying that a $9,100 UBI doesn’t let you eliminate the unemployment benefit, which I thought was the selling point of the whole project. (At least not if you want people to be able to be unemployed in the main centres…)

Assuming no errors or omissions, the above seems to show that canning WFF at the same time does not hurt a family with 2 kids and one working parent. (Splitting income across two working parents makes creating an example slightly harder: the current tax rates are dirrent for 2 people earning $35k v 1 person earning $70k.

Dammit, errors for the $30k. Total family (weekly) effect s’be $25 and $75 (not $84 & $134). I apologise: create in a rush, get killed in a crush. I would normally run these by a colleague, but they are on leave (and this isn’t work…).

@Ray. And the Swiss have a binding Referendum coming up in about June this year. They have been discussing the proposition for a year or two in a non-partisan way. This means at least they are less likely to be swayed by Party rhetoric like Keys instant negative reaction.

Found the Swiss one. “This June, Switzerland will be the first country to actually vote on a basic income. The country’s Federal Council recently approved a ballot measure (#2015 8727) that would give all adults about $2,500 a month (2500 Swiss Francs), and kids about $625 a month.”……
“…The Swiss public is split, though skeptical so far. A (non-representative) online survey found that 49% of people would vote for the initiative, while 43% would vote against. But a better, more recent poll found that only 3% believe the referendum will produce a basic income this year. Fifty-six percent said a basic income will never happen, although a majority of respondents under age 35 said it will materialize at some point.”http://www.fastcoexist.com/3056339/switzerland-will-hold-the-worlds-first-universal-basic-income-referendum

Treasury has a page that describes a simple method for modelling raising revenue through income tax. It takes into account reduced GST revenue and wages from changes to the income tax rate. Obviously there’s more to a UBI then that, but it’s a good start if you’re thinking about how feasible it would be.

Note there are other ways for raising the revenue than income tax (i.e. capital gains tax, property tax, raising corporate tax). The treasury model assumes that for every 1% you raise tax rates, you only get 0.82% back because it reduces spending and depresses economic growth. This is probably not going to be accurate for UBI. It may cause people to work less. It may cause a rise in wages. Given you’re redistributing wealth downwards, and poor people spend more of their money, the GST take should actually increase. The point isn’t so much to say “this is how much it’ll cost”, as to show that it’s in the ballpark of what can be achieved.

I’ve set it for a $11,000 Adult UBI and $4000 child UBI that completely replaces jobseekers, dbp, student allowance, invalids benefits, working for families and offsets student loans by 50% (i.e. living expenses). It leaves pensioners no worse off. I get a net cost of $26,763 billion.

It can be done with the following tax rates on the current brackets plus a new ‘above $150000’ bracket. It results in net income increase for people on and below the median income from wages and salaries. Negative transfers kick in just above that:

up to $14000: 35%
up to $48000: 38%
up to $70000: 46%
up to $150000: 56%
above $150000: 66%

It’s also worth noting that having such a high top tax rate doesn’t bring in that much revenue, so if you could find a few billion elsewhere, you could keep all the rates below 50%.

I love seeing Teachers described as ‘The rich’ for tax-collecting purposes to make UBI feasible as a universal welfare for ‘the poor’. . Why stop there? Lets hit on ‘Nurses’ and ‘MSD Employees’. This whole notion is a revenue-raising gambit by stealth, dressed up as ‘tax reform’ when it appears to calculate its usefulness on the convenient fiction that swathes of people can actually afford to live, play and invest in their futures courtesy of some mythical big salary which somehow qualifies them as the ‘rich’.

Also the notion of handing out cash to people as a UBI – won’t that just devalue cash as a resource? I mean firstly cause prices to rise because theoretically more people can afford to pay more, then pressure prices to rise to accommodate the increased taxation that would be required to redistribute the cash – unless of course, we borrow more to bankroll a government hell-bent on selling its peoples’ futures in the name of short-term electoral gain.

Disclaimer we have ‘claimed’ WFF but I wish we didn’t have to. I also feel that the taxation system essentially bankrolls employers (both Governmental and non-Governmental) by suppressing their need to pay more to their employees.In short this kind of redistribution of wealth by taxation looks like a benefit to ‘the poor’ (you know teachers, nurses MSD employees) , but is in fact a billion-dollar bribe to the (actual) rich – you know multinationals, Governments and International Conglomerates like banks which siphon our productivity offshore.

This ‘Big Idea’ is a rebranding of a sad status quo – a low-wage economy bankrolled by taxation and benefits which facilitates selling our productivity to the highest offshore bidder at the expense of future generations. Or put another way – moving the deckchairs on the Titanic.

@leeharmanclark: There’s pretty good economic literature that indicates that distributing money through the benefit system in a targeted way is far more effective than increasing minimum wages. There is a theme I see a bit on blogs about how the benefit system subsidises employers, but the literature suggests that the incidence of higher wages falls mostly on the worker through higher wages or reduction in other benefits, and further that minimum wages apply to everyone (the 16 year old, the second income earner etc etc – so much of the benefit is captured by high income households). If you want to address those with 2 kids then WFF is actually better (economic) policy. This same criticism applies to the living wage.

I guess my big problem with the UBI is mostly one of temperament, and it goes back to when Gareth Morgan first bought it up in New Zealand, and then went about blithely guessing about how people would have to change their lives to accommodate his new model. Economists like Morgan and Rankin are certainly a lot smarter than I am, but I don’t think they’re smart enough to know what’s actually going to happen if/when we made these vast, sweeping changes to the tax system, welfare system and labour market simultaneously. They just think they are.

Rankin talks about the introduction of superannuation but that was, comparatively an incremental change. People didn’t live that long back then. Not that many people got it for such a long time. It would be nice to figure out a way to address a UBI in a similar way. Incrementally; a phased in solution that happens as the problems it’s supposed to address happen.

Newsflash for the men commenting on this post:
The DPB was abolished a couple of years ago, now all solo mothers without disabilities are work-tested and must acquire at least ten hours a week minimum wage work in order to get any assistance with the rest of their living costs.
Hence the huge upswing in Mum-living-in-cars-with-baby stories, and the rise of ‘precariate’ as a topic.

There’s a huge incentive in that policy change for young mothers to succumb to psychosis & just have the kid/s taken off them. No acknowledgement that DV rates are on the rise, or that social housing has been decimated by HNZ policies of failure-to-maintain thus feeling a housing shortage.

UBI will not solve the current precariate issues, but may bring some very wealthy individuals back into the tax-paying fold, unless they’re paying themselves a salary through into a family trust.

Meanwhile, GST on food, utilities, etc is not going down ever, and lower income households (of whatever configuration) are paying a higher proportion of GST on everyday life expenses from income, due to the unavoidability of grocery & utilty consumption.

The rolling assaults on employment contracts mean that this is not just a ‘poor people’ problem, the middle class are getting squeezed by cost-of-living increases – don’t think that there’s nothing for you in this policy, because when the poorest can’t afford housing, utilities & food, then it’s an indicator that society is running on the wrong settings.

Peasants can’t work to death if the basics of survival are denied to them, m’luds.
You may even be required to learn how to clean your own office-space (including the bogs) & cooking your own lunch, because starvation rates-of-pay in hospo can’t persist forever.

Thank you Paul. it is so refreshing to have my deliberately provocative and often half-baked theories rebutted in a courteous and informed manner. I’m tempted to be convinced by your claim, however, I’m also aware that a lot of half-baked ideological tendencies also underpin the kinds of proposals often floated. I’d love to see some examples of the literature you indicated..

The point of the UBI is to reduce beuraucratic churn. It is effectively a rax change that could be administered with ease by the IRD.

The main benefit of the UBI is lower EMTRs. It means even if someone can only pick up 10 hours of work a week they can do so easily and will not get any benefit removed. The exppectation is you will get more employment not less.

John Key has been utterly specious in his opposition to this which is dissapointing. Its almost like he is so spineless when it comes to real reform of any sort that he wants to pretend such options dont even exist.

@swan: yes, to me the benefit on effective marginal tax rates is the most important bit, and the current biggest flaw in our tax/transfer system. The problem is the same one that prevents us directly addressing the EMTR by adjusting the abatement rate – it means paying welfare to people who are quite wealthy. Which in turn creates churn, because we tax those people then give it back to them. So it’s not a simple calculation.

On John Key….he’s a politician. The same way it’s an opposition leader’s job usually to oppose what the govt does, it’s usually the govt’s job to belittle what the opposition proposes. When Labour don’t have their facts straight and haven’t even calculated how much additional tax would be needed to make it work, then it’s kinda easy to do that.

“When Labour don’t have their facts straight and haven’t even calculated how much additional tax would be needed to make it work, then it’s kinda easy to do that.”

I dont know about the facts Labour dont have straight. Why would you expect them to have settled on tax rates and UBI levels when they are discussing the policy as a concept? That doesnt make any sense, obviously there is a whole continuum on which you can set those things, which would be in response to alk the other considerations.

The header proclaims that the document’s co-author “is currently working on his thesis manuscript, which involves a reassessment of the value of vertu in modern liberal democracies, with a specific focus on democracy in New Zealand.”

WHAT THE FUCK DOES THAT MEAN, KOBE BRYANT?

Dunno about you guys but I detect a distinct odour of Wellington intelligentsia bullshit.

Why would you expect them to have settled on tax rates and UBI levels when they are discussing the policy as a concept?

That gets to the heart of this as a PR exercise.
‘Hey everyone! We’re thinking off giving you all free money!’
‘How would you pay for that?’
‘Woah woah woah! This is just a concept. We don’t have all the details!’

I think the problem is that UBI is a great idea in concept. Who wouldn’t want a guaranteed income level. So if we’re just discussing it in concept, we’re done. But that’s not useful if we can’t afford it.

The analysis I’m seeing basically (particularly from Eric) is that either:
1. You set the level high enough that you can replace all the other benefits without people being worse off. The level is therefore quite high, and you need a lot of tax (more than could plausibly be raised even with very high taxes), OR
2. You set the level very low, in which case you can’t get rid of all the other benefits, because the UBI isn’t enough to live on. And therefore it doesn’t fix abatement rates or get rid of administrative costs.

That’s still discussing at a pretty high level – basically saying it’s either unaffordable or not useful.

Seen in the context of the coming radical alterations to our experiences of work/employment, how can we not afford a UBI, or some equivalent thereof?
Some of you seem to be dissing it by some weird sort of ‘reductio ad absurdem’, just like John Key.

> Most people pay effective tax rates quite a lot lower than this on the bulk of their income. So this sounds like a plan to raise people’s taxes and then pay them the money back again, with the half on lower incomes getting a bit more. At no cost, somehow. Do I have that right?

I think you have it right. Except it’s not “a bit more” for anyone on *nothing* like many people are. It’s a shitload more, a huge jump in their quality of life. For people on not very much it’s also a pretty big deal. For the bulk of the people in the middle it doesn’t have much effect. And for those on above average incomes, it’s a loss.

So yes, it’s effectively a flattening of the income curve. But it’s much more than that because it also creates a minimum baseline, something that simply doesn’t exist in our system now. The minimum is currently zero, and it’s enjoyed by far more people than should be allowed in a country as developed as ours, standing on the shoulders of thousands of years of human efforts, almost all of which were not our own.

Furthermore, as a guaranteed entitlement, it takes away all of the marginal taxation that is currently such a disincentive to people trying to get out of the poverty trap that unemployment (and other hardship related) benefits create. Precarious work becomes something much more worth doing, something you don’t have to hide from the tax man, and something that can’t be brutally withheld by people in positions of power to make you do the unacceptable, because you literally have no backstop.

The effects go well beyond the merely unemployed. They go into the trapped housewives and exploited workers at the bottom, to students struggling to live despite all their best efforts to become more productive worker units, to people thinking of starting up businesses who can’t make the numbers work for the first year, to school leavers who are stuck living at home and can’t work out what to do with their lives and no one wants to hire them full time. It essentially gives far greater freedom to a large sector of the population.

So one the one hand, the pure number crunching, it’s a debate about how to make it add up to zero, how that could work. This is a worthwhile debate. It’s a vital debate, it will never fly without this debate.

But it’s still only half of the debate.

The other half is about the very morality of it, whether it is a good thing to do. This has two prongs.

Firstly the purely economic – maybe it could actually work better, stimulating the economy. That one is not settled, and probably never will be until at least a few countries actually try it. Certainly there are some good arguments that it could do that.

The second part of the moral argument goes to the simple question of whether or not society owes a better deal to people than it is currently giving. This has many aspects. The simplest is purely about compassion. More complex is speculation about the ways in which the removal (or at least massive abatement) of the fear of sudden catastrophic loss of income could change our society.

There’s plenty of people who think that is a step too far, that fear of unemployment or loss of spouse’s income, or Mum and Dad’s support, is the glue that binds our society together. For better or for worse, is the mentality there. And the idea of people being able to live, even in a very meagre way, without working, is anathema. I think such people can only potentially be won over by the purely economic argument, because their value system does not extend to the compassion and liberation arguments. But people who do see those things would probably only need the book-balancing argument to sell them. The improved economy has to be a wait-and-see thing, although intuitively I imagine that a great many people can see that it would certainly apply to them personally, that their lives would be improved by being driven more by the carrot and less by the stick and the options that they know they could take, but have so far been too afraid to, might seem like.

In light of the second part of the debate, *Given* (for the sake of argument) that a book balancing UBI could be found, that doesn’t mean that it’s therefore where it should end. It’s just where it should start. It’s incremental. It can be reversed. We can try it on for size. We can tinker with the settings. If it’s a go-er, then it may well turn out that the enhanced settings that it provides could make for a FAR more stable overall economy, since it would provide a new lever to control economic growth and inflation. In the long run it might seem prudent to put it out of the hands of politicians and into institutional control, rather like the Reserve Bank, changing fluidly within some range to raise or lower inflation, private debt, growth, etc, coupled with existing controls on the OCR, and other financial levers. We might get a bonus to our UBI some years when the tax take has been especially high.

“it needs to be said that some of the more obvious objections to UBI are misplaced. The argument that it is ‘too expensive’, for example, makes no sense given that UBI is a scheme of income redistribution where gains and losses across the population add up to zero. The same applies to the objection that UBI is politically impossible to deliver: a lot of policy proposals have been politically impossible right up to the time a government implemented them.”

@Ross: if the gains that are mooted are greater than the possible losses, then no it doesn’t work. If I say I’ll give everyone in the country $50K UBI, then I’m spending more than the country has in income. If I say $20K then I’m doubling the tax take. Those are material.

Paul, I don’t know why you think the UBI would be set at 50k. If introduced it will be set at a modest figure. No doubling of the tax take will be required, though certainly those who can afford to pay more may be asked to do so. For some time we’ve seen the poor subsidise the wealthy. It’s not unreasonable to turn that on its head.

Ah, but Ross, that’d be in the details, we don’t know what it’d be set at. 🙂 I was using that as an example, to point out that your assertion that it is always zero sum and therefore always OK is clearly not true.